WASHINGTON — Sen. Ron Wyden, the new chair of the Senate Finance Committee, has recently voiced some ideas that would favor the municipal bond market, such as extending bond-related and other expiring tax provisions and reinstating Build America Bonds.
But the Oregon Democrat's past actions, such as sponsoring legislation that would favor tax-credit over tax-exempt bonds, have posed threats to the muni market.
The question is what will Wyden will do now that he has taken over the chairmanship of the finance committee from Max Baucus, who was confirmed as Ambassador to China by the Senate last week.
Wyden is a very strong supporter of tax reform, is something of a policy wonk and has a history of bipartisanship, tax experts agree.
Wyden recently told tax experts in California that one of his first priorities will be to pass a package of tax extenders, or renewing provisions that expired at the end of 2013. These provisions include renewing the tax deduction for state and local general sales taxes in lieu of state and local income taxes, reauthorizing authority to issue qualified zone academy bonds, and increasing the level of spirit excise tax payments into the Treasuries of Puerto Rico and the Virgin Islands. They can be reinstated retroactively.
The extenders bill could be used as a "bridge" to broader tax reform, Wyden told those attending a Tax Policy Center event at the University of Southern California's Gould School of Law in Los Angeles on Feb. 7.
Wyden also said he is a big supporter of the BABs program, which allowed state and local governments in 2009 and 2010 to issue taxable bonds and receive subsidies equal to 35% of their interest costs.
But a tax-reform bill Wyden introduced with former Sen. Judd Gregg, R-N.H., in 2010 and a similar bill he unveiled with Sen. Dan Coats, R-Ind., in 2011, would have halted the issuance of tax-exempt bonds in favor of traditional tax-credit bonds that provided investors with tax credits equaling 25% of the interest costs. The bills also would have eliminated the ability of muni issuers to do advance refundings.
The bills would have lowered the top individual tax rate to 35% but also would have repealed the alternative minimum tax, which currently must be applied to private-activity bonds and increases their interest rates.
The tax exemption for munis has been criticized as being inefficient and disproportionately benefiting the wealthy. By moving from tax-exempt to taxable bonds with a tax credit for investors that is lower than the top individual rate, Wyden has been trying to "redesign the system" so that munis are more attractive to the middle-class as opposed to the wealthy, said Howard Gleckman, a fellow at the Urban Institute.
"He's trying to encourage this shift," Gleckman said. During his speech in California, Wyden talked about the importance of doing more for the middle class in a Nieman Marcus/Dollar Tree economy.
In July 2011, Wyden and Sen. John Hoeven, R-N.D. introduced a bipartisan bill that would authorize $50 billion of traditional tax-credit bonds for transportation projects, called TRIP bonds, over a six-year period. He continued to push for TRIP bonds in recent years legislation, saying he gave up on BABs at one point, because Republicans were so opposed to them. Republicans claimed they provided huge fees for underwriters and encouraged issuers with the lowest credits to sell more bonds. While tax-credit bonds are viewed as more economically efficient than tax-exempt bonds and can be scored to offset rate reductions, they haven't been accepted by the market, said Bill Daly, director of governmental affairs for the National Association of Bond Lawyers. "They have not yet shown to work," he said.
Issuers and dealers have complained they can be hard to sell because buyers have to want, or to be able to take, the tax credits.
Uncertainty
And though Wyden has proposed favoring tax-credit bonds over tax-exempt bonds in the past, it is not a certainty that, as chairman, he would introduce a tax-reform bill with that concept as chairman, particularly if he cannot get other members' support for it, experts in the muni market said.
Susan Collet, senior vice president of government relations for the Bond Dealers of America, said that chairmen take the views of other committee members into consideration in legislation and try to find compromises among members.
"The chairman role is just a very different role," she said.
Daly said that Wyden might be willing to make changes to his muni proposals, but he would want to hear alternatives that meet the goals he is trying to achieve.
Wyden's staff is "certainly open to discussing things," he said.
Wyden is a staunch advocate for tax reform and has been saying for years that the tax code needs to be updated. Micah Green, a partner at Patton Boggs and the former president and co-chief executive officer of the Securities Industry and Financial Markets Association, compared Wyden with former Sen. Bill Bradley, a Democrat from New Jersey. Wyden attended the University of California in Santa Barbara on a basketball scholarship. Bradley is a Hall of Fame professional basketball player. Both have been leading proponents of tax reform and are considered to be policy wonks.
Wyden has been willing to be specific about his ideas for tax reform, "which is to his credit," Daly said.
He and his staff are very familiar with muni issues, Collet said. "We're glad to have someone so knowledgeable," she said, though she added, "We remain concerned about any kind of limitation on the tax-exemption for municipal bonds."
Ed Kleinbard, who was chief of staff for the Joint Committee on Taxation from 2007 to 2009, said that Wyden worked hard to understand the issues and make difficult tradeoffs.
"He was extremely engaged personally in issues," said Kleinbard, now a professor at the USC Gould School of Law.
Wyden will face some challenges as far as timing on tax reform. Market participants believe that enacting tax reform will be difficult in 2014 because it's a midterm election year, the tax code is large, there's not much interest among top House and Senate leadership to move forward, and Republicans and Democrats continue to disagree about whether tax reform should be revenue-neutral or revenue-raising. With chances for tax reform slim, the issue is whether or not there will be any progress.
"My guess is there will be a lot of hearings," about aspects of tax reform, said Leonard Burman, director of the Tax Policy Center. Hearings could focus on topics like how to simplify the tax code and how to treat low-income families, he said.
Daly agreed and said there could also be more tax-reform discussion drafts. Late last year, Baucus released four discussion drafts that focused on specific areas of the tax code.
Collet said that while the research and work that Baucus' staff put into the discussion drafts will be useful, there probably will not be much in the way of tax-reform activity this year.
Gleckman said that more than likely, broad tax reform will not happen until after the next presidential election. But he added that in 2015, it is possible that Congress could move forward on a bill that streamlines the tax code without changing rates or raising revenue as an interim measure between the current tax code and full tax reform.
But Wyden might not have the opportunity to be chairman for more than just this year. If the Republicans have a net gain of at least six seats in the Senate, they would control the chamber and the committee chairmanships.
Infrastructure
Wyden also has more time-sensitive issues to deal with than comprehensive tax-reform.
In addition to the tax extenders, he will have to tackle infrastructure investment this year.
The Highway Trust Fund, which provides federal funds for surface transportation projects, is expected to have a shortfall before Sept. 30, the end of the fiscal year. The HTF is primarily stocked by motor fuel tax revenues, and the Senate Finance Committee has jurisdiction over the revenue going into the HTF.
"It is our hope that ensuring the long-term solvency of the Highway Trust Fund is one of [Wyden's] top priorities," said Jim Tymon, director of management and program finance for the American Association of State Highway and Transportation Officials. If the HTF goes broke, states will not be able to get reimbursements for commitments that have already been made, and the HTF won't be able to make new obligations to fund new projects in fiscal 2015, he added.
"Sen. Wyden has a long history of support for smart infrastructure spending and innovative financing," said Janet Kavinoky, executive director of transportation and infrastructure for the U.S. Chamber of Commerce. "He is well aware of the issues facing the Highway Trust Fund, and the committee staff has been exploring the issues for quite some time, so I feel positive about his leadership and the prospects for action."
Wyden said in California that lawmakers won't be excited about raising the federal gas tax. Asked about alternatives, he said he doesn't want to get ahead of his colleagues when it comes to solutions for funding transportation projects in light of the HTF's problems. He said he has already been discussing these issues with Sen. Barbara Boxer, D-Calif., chairman of the Environment and Public Works Committee who plays a key role in transportation reauthorization bills.
Wyden has proposed TRIP bonds for transportation projects in the past. But "while that effort is good for encouraging investment, it doesn't address the solvency issue with the Highway Trust Fund," Tymon said.
Wyden said he has always seen BABs as a way to generate more investment for infrastructure projects. But any effort to revive BABs could be done separately from a full tax-reform bill, Gleckman said.
The subsidy payments for BABs issued in 2009 and 2010 have been reduced because of across-the-board spending cuts known as sequestration and offsets for other federal funds the issuer owes. Gleckman said that any bill reviving BABs would have to address sequestration and make sure that issuers get their promised payments.
Frank Shafroth, director of the Center for State and Local Government Leadership at George Mason University, said that Wyden could try to do some form of infrastructure tax reform this year because infrastructure is not really a partisan issue and it might be an area of tax reform where Wyden could make progress. If an infrastructure tax reform bill comes to fruition, there's a "real possibility" it could include a change to the tax-exemption, he said.
A History of Bipartisanship
Wyden was born in 1949 in Wichita, Kan., and attended UC Santa Barbara before transferring to Stanford University where he received his bachelor's degree. He received his law degree from the University of Oregon. Afterwards, he taught gerontology and co-founded the Oregon chapter of an advocacy group for the elderly. In the late 1970s, Wyden served as director of Oregon Legal Services for the Elderly and was a member of the Oregon State Board of Examiners of Nursing Home Administrators, according to the Congressman's website.
Wyden was first elected to the House in 1980 and then was elected to the Senate in 1996 in a special election to replace Republican Sen. Bob Packwood, who resigned after allegations of sexual misconduct arose.
Packwood was the Senate Finance Committee chairman during the 1986 tax reform and worked with Democrats to obtain the reforms.
Like his predecessor, Wyden also engages members of his opposing political party, said Chuck Samuels, a partner at Mintz Levin. "It's sort-of an Oregon way to work in a bipartisan manner," Samuels said.
"I think Ron Wyden has shown an ability to reach across the aisle," said Green.
Not only has Wyden introduced tax reform bills with Republican cosponsors, he also offered a Medicare reform proposal with Rep. Paul Ryan, R-Wis., in 2011. This is significant because Ryan may become the top taxwriter in the House in 2015. The current chair of the House Ways and Means Committee, Dave Camp, R-Mich., is likely in his last year as chairman due to term limits and Ryan has announced he is interested in succeeding Camp.
"I think you could get a lot of cooperation between Wyden and Ryan," Gleckman said, though he noted that the challenge would be to get House and Senate leadership on board to move forward with tax reform.
Baucus also made efforts to be bipartisan, touring the country with Camp last summer to discuss tax reform with business leaders, policy makers and citizens.
But personality-wise, Wyden is very different from Baucus, Gleckman said. Wyden's an extrovert, while Baucus is an introvert. Wyden is also more progressive and is from a more liberal state than Baucus, he added.
Additionally, Wyden is more of a policy wonk who "loves to get into the details of legislation," Gleckman said.
